Alberta royalty review report released today
Edmonton Journal
Published: 10:27 am

EDMONTON - The provincial government's long-anticipated royalty review panel report, examining the formula for royalties for bitumen mined from northern oilsands, conventional oil, natural gas and coal bed methane, will be issued this afternoon.

Critics have said that the public is not getting full value from oilsands royalties, due to a formula structured 10 years ago whereby companies pay only one-per cent on bitumen until their capital costs are paid.

In recent years, Alberta's take from the oilpatch has decreased to about 19 per cent from an overall goal of 25 per cent.

Almost 30 per cent of the province's $36 billion in revenue comes from non-renewable resource royalties.

A panel to assess oil resource royalties was formed in February.

It'll be interesting to see whether or not the government will actually take concrete action against these companies. Seems sort of unlikely, knowing Stelmach he'll probably bring in some sort of new oilsand development subsidy to appease the oil producers in the event his hand is forced to increase royalty levels.

The report should be released within a few minutes.

So the number is to a tune of 2 billion dollars that we're missing out. Mind you, much of the oil sands developments are not up and running yet so that number will surely rise as more come online.

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Albertans shortchanged billions in royalties: review
Panel recommends significant hikes and more accountability
Darcy Henton, Edmonton Journal
Published: 3:28 pm

EDMONTON - Albertans have not been getting their fair share of oil and gas royalties and are entitled to another $2 billion per year, says a new Alberta government-commissioned report released today.

An expert panel appointed by Premier Ed Stelmach says Albertans have probably been shortchanged a billion dollars a year over the past five or six years.

The panel recommended hikes in royalties that will boost revenues and called for more accountability to ensure that Albertans know what return they are getting.
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The tersely worded 104-page report says that hasn't been the case to date.

"Albertans do not receive their fair share from energy development and they have not, in fact, been receiving their fair share for quite some time," said panel chairman Bill Hunter.

"By recommending an accountability package in the strongest possible terms, the panel intends that both government and industry will be forced to gather and produce data so that statistics and actionable information can be reported to the owners."

The panel has also called for a price-sensitive severance tax on bitumen and a credit for bitumen upgrading that occurs in the province.

Premier Ed Stelmach declined to say whether the province will in fact hike royalties, but promised his Tory government will respond to the report in October.

"It has to work for Albertans and it has to work for industry," he told reporters at the legislature. "It has to be fair, but it also has to be competitive."

He said his caucus will begin reviewing the report Wednesday.

Liberal Leader Kevin Taft said billions of dollars have been lost because of the way the Progressive Conservative government has managed the royalty regime.

"The Tories have failed the people of Alberta and they have failed them badly," he said.

The report says it doesn't believe the government has "sufficient expertise" to keep up with developments.

It says the workings of the energy industry appear "shrouded," but suggests that is not intentional.

"Imagine the repercussions if the income tax system experienced such drift and nobody knew and nobody seemed to give 'a tinker's damn.' "

Hunter said the fact remains the resources belong to the people and that hasn't always been clear to the government in the past.

The panel recommended a five-per-cent increase in Albertans' current share of conventional oil and natural gas production and a 17-per-cent hike in oilsands revenue.

The panel has recommended that the province maintain the controversial one-per-cent tax royalty "holiday" that oilsands companies currently enjoy until they pay off their intitial costs, but recommends ratcheting up the royalties from 25 per cent to 33 per cent once they reach that point.

It says that will enable Alberta to remain competitive internationally, but it acknowledged it will slow the pace of oilsands investment.

Hunter reiterated that the government can't pick and choose from the recommendations, but must implement them all in order to boost the revenues by $2 billion annually.

The panel rejected oilpatch claims that its recommendations will damage the industry.

The panel also offered a suggestion that Alberta should consider a new tax on energy production as well as mining, forestry and agriculture that would be used for environmental protection for future generations.

dhenton@thejournal.canwest.com

See Wednesday's Journal for full coverage of the royalties review report.

Not a compromise: Stelmach
Opposition begs to differ as premier rejects almost half of royalty panel's recommendations
Archie McLean, Jason Markusoff and Darcy Henton, The Edmonton Journal
Published: 6:55 am

CALGARY - Alberta will sharply hike its oil and gas royalties to collect an extra $1.4 billion by 2010, but that's still $463 million less than the recommendations of the blue-ribbon royalties panel.

Premier Ed Stelmach made the closely watched announcement Thursday in downtown Calgary.

The bulk of the royalty increases will come from the oilsands, whose rates will now be set on a sliding scale depending on the price of oil. Conventional oil and natural gas rates will also rise and fall with commodity prices.

Stelmach's plan also grants significant concessions to industry. He rejected almost half the review panel's recommendations, most notably a new severance tax on oilsands production. Companies must implement the changes by January 2009, six months later than the panel suggested.

Industry reacted with anxiety, but also some optimism for the future of the oilsands. Stelmach stressed that his framework is not a compromise; he called it a historic day.

"When future generations look back at today I believe they will see we were fair and reasonable -- not greedy or short-sighted," Stelmach said. "I am confident we've made the right decision for today and for Alberta's future."

Speaking to reporters in Lethbridge Thursday night, Stelmach shot back at some critics in the investment industry who, after the royalty review was first released, issued fevered warnings claiming the review's advice would put Alberta in line with some South American strongmen, such as Venezuela's Hugo Chavez.

"We're not Communists. I'm not whatever-his-name-is in Venezuela," he said. "This is Alberta. We share the returns of our economic rent with all Albertans, and that is a lot different from some of the countries we are continually compared to."

NDP Leader Brian Mason says the premier caved to big oil.

"He may deny he blinked but he has something in his eye. Those eyelids are going up and down pretty fast. I would say the premier did blink."

Mason said Alberta will continue to be one of the lowest royalty jurisdictions in the world under the new formula.

Stelmach also launched a review of the energy department's royalty collection, verification and reporting, which was heavily criticized by both the panel and by Auditor General Fred Dunn for being sloppy and poorly documented. A former auditor general, Peter Valentine, will lead the review, which is slated to be completed by the end of March.

But neither Mason nor Alberta Liberal Leader Kevin Taft have confidence it will address the concerns that billions of dollars owed to the government have gone uncollected in the past.

"The accountability measures that the Auditor General recommended are blatantly missing from this report," Taft said in a statement. "This is another example of Mr. Stelmach's broken promise to lead a government that's accountable to Albertans."

The government is also dipping its toe in the bitumen market. It will begin accepting bitumen in lieu of royalties, which they may use bolster the province's upgrading capacity.

One of the most monumental decisions in Alberta political history, and certainly the biggest in Stelmach's first 10 months as premier,was set it motion when Stelmach promised a review of royalty rates during last fall's Tory leadership race. In May, he appointed a six- member panel to look at the issue.

The six delivered their recommendations five weeks ago, which set off intense debate, particularly from energy executives who said changes to the province's royalty structure would cripple the industry and trigger job losses across the province.

But the panel members rejected claims their report was extreme. Their data showed that current Alberta royalties lagged far behind those in places like Texas, Wyoming, Britain or Norway, and their proposed changes would still give Alberta one of the world's most business-friendly royalty regimes.

The panel's argument was bolstered by a report last month from Auditor General Fred Dunn, who said government officials knew for several years they could easily collect an extra $1 billion annually from the resources sector -- but its leaders refused to do so.

Under the new agreement, oilsands companies will pay anywhere from one to nine per cent in royalties until their project is paid off. After that, they will pay 25 to 40 per cent, depending on the price of world oil.

Stelmach agreed with the panel's warning not to exempt some companies from the new agreement. But they already have royalty deals with Syncrude and Suncor Energy which last until 2016.

The government said they are in negotiations with the two companies to participate in the new program by 2009. If they don't reach an agreement, the government will "take other measures" to ensure they do so.

Suncor Energy later issued a statement saying, "the royalty regime changes proposed by the Alberta government are substantial and could have a significant impact on industry economics. We will need time to study the changes and their potential impact on our business."

Reaction across the province varied.

"It's taking us in the wrong direction, especially on oilsands," said Jaisel Vadgama, a Pembina Institute policy analyst. "Up until $55 per barrel, we're still at today's regime, which is clearly inappropriate."

Tristone Capital's analysts predicted the death of the coming winter's drilling season and an ugly day on stock markets today. "This will result in the loss of the winter drilling season, a decrease in royalties for 2008 and 2009, and in a nutshell, it will not be a bigger pie," Tristone president George Gosbee said. "It will be a smaller pie. This is a loss for all Albertans...I'm in utter shock."

Pierre Alvarez, of the Canadian Association of Petroleum Producers, said the whole industry is "very concerned" about the magnitude of the changes.

"I think it's going to depend company by company, but I think it is an enormous burden," he said in an interview.

Still, the oilsands decision also drew some optimism from William Lacey of First Energy, a group which grimly predicted the fully adopted report would cause up to 30,000 job losses.

"This is probably the best possible outcome of a number of bad outcomes," Lacey said.

amclean@thejournal.canwest.com

jmarkusoff@thejournal.canwest.com

dhenton@thejournal.canwest.com

Alberta should hold firm even if the oil companies threaten to leave. It's business, so it's not like Big Oil would give Alberta a break if the tables were turned and oil was cheap. Right now it's closing in on $100/barrel, at that price the oil sands are very profitable even with the new royalties. Plus there's little threat that the government is going to expropriate private oil production, unlike in some other jurisdictions.

Royalties 'Blatant deceit'
Gov't depriving albertans, review panel member says
Jason Markusoff and Jason Fekete with files from Gordon, Calgary Herald; Reuters
Published: 6:25 am

EDMONTON - Ed Stelmach's new royalty regime is a "blatant deceit" that deprives Albertans of a fair share, a member of his royalty panel charged Friday.

The premier insisted his plan is balanced and will go ahead as planned.

The panelist, who asked not to be identified, said Stelmach's royalty strategy is a misleading response to what the royalty report and economic data suggest are best for Albertans.

"It's a political document that's not really grounded in too much economic reality," the panelist said.

"It's a lot of dread. ... Just seeing it unfold is like a Greek tragedy," the panel member added, saying the government's rejection of so many recommendations was a slap in the face.

As a result, Albertans "absolutely are not" receiving a fair share of the publicly owned oil and gas resources under the new deal.

Instead, the province could actually collect fewer royalties in the future because the government ignored several key recommendations, including an industry-wide oilsands "severance" tax.

"Overall, we could end up with less (in royalties) than we're getting now," the panelist said.

A big reason for that is the government's current deals with oilsands giants Suncor and Syncrude, and its plan to move the companies to the new royalty structure.

The agreements -- which allow the companies to pay royalties on the price of lower-valued bitumen rather than synthetic crude -- don't expire until 2016 and will eat away at the government's royalty take.

But had Stelmach adopted the oilsands tax, as recommended, he could have recouped some of the revenue lost by the agreements.

The only way the government will ever get Suncor and Syncrude to abandon their current deals is through a buyout worth "double digits of billions of dollars," the panelist said.

"If I was in Suncor's or Syncrude's shoes, Iwould be doing the happy dance," said the panel member. "They won the lottery."

Stelmach, in Calgary, rejected suggestions he's not delivering Albertans the fair share he promised.

"If we don't develop the resources in a very responsible manner, there won't be any revenue coming to the province in form of royalties," he said. "It is a balance."

As dust settled on Day 2 of Alberta's new royalty era, struggling natural-gas firms still had fears the winter drilling season is imperilled, while developers of a couple of oilsands projects announced they'll press ahead as planned.

But the "ugly day" some stock-market analysts feared never materialized.

On the first trading day after Stelmach announced royalties would rise by $1.4 billion by 2010 -- $463 million less than the review panel recommended -- oil and gas stocks rose 0.2 per cent. They had help as oil rocketed as high as $92 US a barrel.

Stelmach argued investors' muted reaction suggests "everything held its own" and that he found the right balance.

To analyst Peter Linder of Delta One Capital Partners, the stock market's response suggests that protests about Stelmach punishing Alberta's dominant industry are "much ado about nothing."

"The royalty proposed by the panel was watered down significantly, I feel, and the new royalty system is such that the industry can live with it, and I think the industry will live with it," he said.

"As much as it's a bigger slice of the pie, there's still enough of the pie left for the industry left to be healthy," Linder said. "It's still severe in some cases, but it could have been a lot worse."

Liberal Leader Kevin Taft added his voice to the chorus of those saying Stelmach is continuing to shortchange Albertans, which the auditor general and royalty panel said the Ralph Klein regime knowingly did for years.

"By falling well short of the recommended goals of the royalty review panel, he has compromised on a compromise," Taft said.

Higher royalties on natural gas stand to hurt a gas sector that has idled rigs because of high costs and low gas prices.

Tristone Capital eased off its declaration that the winter drilling season is dead -- saying some, like Talisman, can afford to come back thanks to new deep-well incentives. But Tristone said the picture's still grim.

Companies will still see a much more attractive royalty system in British Columbia, Tristone analyst Cristina Lopez said.

"The plays that straddle the border are going to be drilled across the border, and not in Alberta," Lopez said. Even though new royalty rules don't take effect until January 2009, firms set up deep-gas rigs for multi-year activity, and most players are now mulling how much of the winter activity to cut, beyond what's already savaged by lousy prices.

Grande Prairie Mayor Dwight Logan said he doesn't think there were "substantive changes" to the royalty system that would put the city's booming, natural gas-fuelled economy in trouble. He's more afraid of the factors already hurting the sector.

"If we don't see the market rise in the U.S., things will stay a little slow," Logan said.

As for the oilsands, analysts were relieved Stelmach rejected a new "severance tax" on bitumen, and instead gave them something closer to what industry wanted -- adjustments to the current formula that rises only as oil lifts above $55 US per barrel.

Petro-Canada said it will press ahead with design and engineering for its $26-billion Fort Hills oilsands project and the steam-driven MacKay River expansion.

"With what we've seen, that still is the right path for us to be taking, so we're still going full speed ahead to get to those decision points," said Andrew Stephens, Petro-Canada vice-president of corporate relations.

Connacher Oil and Gas also expressed faith that it can still comfortably profit in the oilsands.

"The new policy will not impair our decision to proceed with continuing evaluation of our oilsands acreage with our Algar project," Connacher announced in a statement.

EnCana, the first company that threatened to cancel $1 billion in spending plans in gas and oilsands, is still studying the impacts of the new royalty system, spokesman Alan Boras said.

Meanwhile Canadian Oil Sands, the largest partner in Syncrude, reacted cautiously to Stelmach's insistence that Syncrude and Suncor must renegotiate government agreements that would exempt them from new oilsands rules until 2016, or face unspecified alternative measures.

"We must ensure that our legal rights are preserved," Marcel Coutu, CEO of Canadian Oil Sands, said in a statement.

Stelmach's push to convince Albertans he's struck the right balance continues today as he speaks to a conference of his Progressive Conservatives. The party counts among its members some of the oil industry's loudest advocates against higher royalties.

Energy Minister Mel Knight begins a one-week trip Sunday to New York, Washington and other United States cities to sell the reforms to U.S. industry, investors and government officials.

A $225,000 ad campaign began in Alberta newspapers Friday, light on details but boasting that Stelmach "delivered" for the public.

"They royalty report was an economic document," complained Frank Atkins, an economist at the University of Calgary. "They've taken it and made it a political document."

NDP added further to the politics. Leader Brian Mason accused his fellow opposition Liberals of helping the government go easy on royalties by not firmly demanding a higher government take when Stelmach was still mulling his decision.

http://www.canada.com/edmontonjournal/news/story.html?id=3e714a94-122d-432e-99c9-c952d8dd3642

Alberta should hold firm even if the oil companies threaten to leave. It's business, so it's not like Big Oil would give Alberta a break if the tables were turned and oil was cheap. Right now it's closing in on $100/barrel, at that price the oil sands are very profitable even with the new royalties. Plus there's little threat that the government is going to expropriate private oil production, unlike in some other jurisdictions.

While it's a gamble to expect prices to stay as high up as they are, there doesn't seem to be enough evidence that there will be any reprieve from such high prices for the long while.

There is also a basin Saskatchewan and Manitoba that hasn't been tapped all that much - don't know why though. It's not like they didn't know about it before. *shrug*